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Regulation and Compliance > Federal Regulation > FINRA

LPL Fined $3M for Failing to Investigate Red Flags, Supervise Reps

By Jeff Berman

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What You Need to Know

  • According to the AWC letter, two LPL representatives converted about $2.4M from 13 LPL clients through third-party transfers.
  • During the same period, at least 50 LPL registered representatives electronically signed another person’s name on LPL documents.
  • LPL Financial has agreed to implement written supervisory procedures to prevent the same incidents from happening again.

The Financial Industry Regulatory Authority fined LPL Financial $3 million for allegedly failing to adequately supervise the firm’s registered representatives, according to the regulator.

Without admitting or denying FINRA’s findings, Matthew Morningstar, an LPL executive vice president signed a FINRA letter of acceptance, waiver and consent on July 10. FINRA signed the letter on Tuesday.

LPL consented to the regulator’s sanctions, which also included paying restitution of $100,000 plus interest to clients and agreeing to conduct a review to identify and, as applicable, pay restitution to affected clients for improper transfers of money, according to FINRA.

LPL also agreed that, within 90 days of the notice of acceptance of the AWC letter, a senior manager and registered principal of the firm will certify in writing that, as of the date of the certification, the firm remediated the issues identified in this AWC letter and implemented a supervisory system, including written supervisory procedures to prevent the same incidents from happening again.

“LPL takes its compliance obligations seriously and has made investments to address the underlying issues related to this matter,” an LPL spokesperson told ThinkAdvisor by email on Wednesday. “The firm fully cooperated with regulators to resolve and remediate this matter.”

Red Flags Missed

On Dec. 7, 2022, FINRA said it found that LPL “failed to investigate red flags related to a registered representative’s undisclosed outside business activities and, as a result, the firm failed to reasonably supervise transfers of customer funds to third parties, in violation of FINRA Rules 3110 and 2010.”

In that particular matter, LPL “failed to detect that one of the firm’s registered representatives caused five customers to transfer funds from their firm accounts, or from annuity contracts that the customers held, to a third party; the funds were ultimately converted by the third party.”

In response, LPL consented to a censure and a $150,000 fine, FINRA said.

On Dec. 3, 2021, pursuant to a consent order, Connecticut’s Banking Commissioner ordered LPL to pay $500,000 for its failure to supervise two registered representatives who converted customer funds, including transfers of customer funds from a firm account to a bank account held jointly by a client and one of the registered representatives.

On Jan. 20, 2011, FINRA said it found that LPL “failed to establish, maintain and enforce a supervisory system reasonably designed to review transmittals of funds and securities” from the accounts of clients to third parties, in violation of NASD Rules 3010(a), 3012(a) and 2110.

In that case, LPL “failed to detect that one of the firm’s registered representatives converted cash and securities” from clients’ accounts. The firm consented to a censure and a $100,000 fine over that, according to LPL.

From May 2018 to August 2020, two LPL representatives, acting independently of each other, converted about $2.4 million from 13 LPL clients through third-party transfers, according to FINRA.

Mass Forgery

During the same period, at least 50 LPL registered representatives electronically signed another person’s name on more than 1,000 LPL documents, including on documents that were required books and records of the firm, according to FINRA. “One was an electronic forgery on a wire transfer request form in August 2020, which was part of the conversion,” FINRA said.

The investigation originated when LPL notified FINRA, a few weeks before filing the required Form U5, that it had terminated one of its registered representatives for misappropriating client funds.

From May 2018 to May 2019, an LPL rep, described only as Representative 1, converted funds from nine of his clients, five of whom were seniors.

In total, Representative 1 caused his clients to issue 36 third-party checks totaling about $550,000 from their LPL accounts payable to the entity he controlled. Eleven of the checks were mailed by LPL to the client’s address of record; LPL sent 25 of the checks to Representative 1 at his disclosed “doing-business-as” address.

In August 2020, a different LPL rep (Representative 2) converted funds from four of his clients, three of whom were seniors, according to FINRA. Representative 2 then misappropriated about $675,000 of the clients’ funds for his own personal use.

Separately, that same month, Representative 2 electronically forged the signature of a different senior client on a wire transfer form to transfer about $1.2 million from her LPL account to a law firm in connection with Representative 2’s own purchase of real estate.

Jeff Berman

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